Crowdsourcing or Crowdfrauding? The Truth Behind Kickstarter

Kickstarter was meant to herald the age of a new generation of innovators. Forget about lengthy business plans and battling the banks for high interest loans, Kickstarter could get your project funded and up and running within a matter of weeks-with nobody to pay back at all. A haven for budding entrepreneurs and creative people, it offered a place to crowdsource funding for all types of ventures- arts, science, nature and more- and allow people access to financing that might have other ways have been far out their reach.

Kickstarter epitomized the web 2.0 generation, using goodwill and investment from engaged online people to help small business and people start up brands and create something special. Founded in 2009, the business grew rapidly, attracting a devoted following of web ‘angels’ who were interested in helping out new businesses.

Kickstarter might not be a success story for everybody, but some of its projects have been highly notable . Major ones that have been created through its funding process include the New York Lowline- a renovation of an underground trolley park near the Williamsburg Bridge that aims to replicate the success of the New York Highline underground, and the Pebble E-Paper watch.

The Pebble E-Paper watch raised $10,266,846 in funding, a number far higher than the $100,000 requested. The watch design connects to smartphones via Bluetooth and vibrates with incoming calls and texts. A simple premise, but one which captured people’s imaginations.

Another success story was a project called Amanda Palmer & The Grand Theft Orchestra album. Palmer was looking to raise money for a new solo venture and requested help from her community. She asked for $100,000 and the full amount raised was a whopping $1,192,793.

Despite these impressive launches and Kickstarter’s recent expansion into the UK, the nature of Kickstarter seems to be evolving away from its original purpose. Recent Kickstarter project launches have involved, large well established and well funded companies using Kickstarter as a way to raise revenue for their own projects.

Examples of this are Outdoor Technology’s Turtle Shell. This stylish Bluetooth speaker was first revealed in January 2012 at the Consumer Electronic Show. It caused a lot of press buzz over its stylish and durable design- perfect for extreme sports fans and outdoors types who want some tunes with their cave diving. However, not a huge amount was heard about it till Chip Chick received an email from the MaxBorges PR Agency sharing the news that there were ’14 days to left’ to fund this project on Kickstarter. For extra clarification on Max Borges PR agency, some of the brands they represent are V-Moda headphones, Marshall Headphones and Archos, so their services don’t exactly come cheap.

When you look at the Kickstarter page for the the Turtle Shell Bluetooth speaker, you can see that they raised $92,089 – much higher than their request for $40,000.

*Update: This project did give back to people who contributed funding, by giving those who paid different amounts a free Turtle Shell.

It’s great for large companies to get a lot of funding come in, but it does feel a little unfair that the consumer who helped fund a project for a company with money will in effect pay twice (depending on the project) – to fund and to purchase it, which doesn’t seem very reasonable. It’s one thing to show support to an up- -and-coming, but a company that’s established and can hire a big agency? Not so cool.

This isn’t a one off example, as numerous other emails have hit Chip Chick’s inbox with pleas from PR folk to help them out

IoSafe also reached out to people to ask for promotion of their Kickstarter project and ioSafe is a big name company that specializes in information backup. Every January they put on a lavish CES event with great spectacles this year we saw their rugged hard drive stay safe from a Tesla Coil unit, so they’re not exactly destitute.

They may be a small company – 25 people on their team but they have been very successful in their field. That doesn’t mean we understand why they felt they needed to fund a new product-the ioSafe NAS N2 via Kickstarter.

This argument doesn’t really convince me, as they have managed to successfully launch products before without getting the public to pay for it. This may have been the way Kickstarter felt as well, as this item can’t be found on any of Kickstarter’s pages and ioSafe recently launched their goal to raise money for this item on IndieGoGo, a Kickstarter competitor. They are requesting $150,000 and so far they’ve raised $21,029 in donations

The idea of fairness here is the bigger problem, and challenges the way we look at Kickstarter.

Is it an altruistic company trying to give people a helping hand, or is it a business, with the helping hand merely the framed trajectory for its financial growth? It’s unrealistic to expect any company not to have profit as an option, and Kickstarter has never lied about their goal to make money.

Currently, they receive revenue by taking a 5% fee of all funds collected in the US- so it’s in their interest that projects become successful and also why they allow projects to be overfunded, the money requested can be exceeded.

Kickstarter is not unaware of the growing disillusionment that people are finding with it service, and have made some inroads on adapting their site for this. They declined to comment on this article, but they have altered their rules for product submission, in an attempt to refine the projects that get approved on the platform.

Prior to this rule change, projects that were simply at the concept stage were allowed to ask for funding on the site, and this created a rather strange state of affairs, where you didn’t know if what you were investing in was physically viable.

In a blog post on their own site Kickstarter stated that, ‘Kickstarter Is Not a Store, it’s a new way for creators and audiences to work together to make things.’

They go on to explain that future project submissions must comply with a Risks and Challenges section which allows potential investors to assess how likely it is the project will come to completion. The idea is that this will add transparency about the creators own skills. Simulations are no longer allowed and a working prototype must exist. There also needs to be some renderings provided via CAD drawings. The main idea is to cut back on projects that are pure concept with little potential for follow through.

Though this is a smart idea in helping whittle down the number of unfeasible project submissions, this might also be a challenge to the smaller creator, who may not have the resources to build a prototype before submitting an idea. Currently this only applies to the Hardware and Product Design section of submissions. Perhaps Kickstarter will see how this works and look at rolling it out to other areas of the site too.

Maybe we’re creating an issue out of nothing, but it does seem that Kickstarter is allowing large companies to use its services as an incubator, which detracts away from smaller companies, which are trying to make it,

The problem seems to be twofold here. Firstly, it takes away from the element that the ‘little person’ can get recognition and help for a project and secondly, it means that the consumer actually pays TWICE- first to fund the project and then to buy it. Kickstarter project investors generally get no rights to projects that are created, so apart from a thank you page on the site, there is little recognition and certainly no freebies.

Ian Ferguson, an engineer from Formlabs only has positive things to say about his experience with Kickstarter. Formlabs asked for $100,000 in donations, but the number they received exceeded that – more like a total of $2,945,885 was raised.

‘Formlabs wanted to create portable 3D printers that were available for the small businesses and make them affordable”, Ian says. ‘By providing a printer that is much easier to purchase we’ve also had to make it more accessible to the wider range of people who will use it. This means designing for ease of use throughout the whole 3D printing process.’

He was happy to use Kickstarter as a way to raise funding and says ‘ it felt like a good fit’. Ian found Kickstarter very helpful to work with. “Kickstarter and their staff were very helpful. They went over what we were putting up. Made sure we were being clear what we were offering and what the risks were. Overall they gave us useful advice and helped make our launch go very smoothly.”

Formlabs did all the promotion of their brand by themselves; as they needed to raise the money to create the printer, not pay a PR firm. “We did all of our own PR. We are very proud of building our own business and the vision of our company. We thought it was best to communicate that ourselves because it is so important to us”

It’s great to hear that people are continuing to have good experiences with Kickstarter, but Ian’s views may be colored by the fact that his project was so successful- something which can’t be said abut the majority of projects on the site.

To get more clarification on projects that succeed- or didn’t, the website The Kickback Machine offers useful tools for analysis. Created by Dan Misener, the website is designed to feature all the FAILED projects from Kickstarter, to allow people to realize that not everyone becomes Formlabs or the Pebble E-Paper Watch. Misener has written extensively on the algorithms used by Kickstarter for displaying failed and successful projects and The KickBack Machine is designed to help people Crowdfund successfully by looking at failed projects. Misener says that:

“Before you launch your own Kickstarter campaign, it’s important to research past projects, so you can understand what works and what doesn’t. Kickstarter’s website does a good job of helping you find past successes. But it can be very difficult to find past projects that failed to meet their funding goal. The KickBack Machine allows you to browse past successes and failures to help you better plan your own campaign.”

I’m not aware if Misener is working on a way to look at failures and successes in terms of bigger businesses using Kickstarter, but this might be an interesting tangent to explore in the future.

Kickstarter does provide some stats about funded projects themselves, but I wonder how skewed this will become towards big companies using the site as an incubator.

I don’t think Kickstarter are intentionally ‘crowdfrauding’ people by allowing large and profitable companies to use their site, but it does change my perception of where they might end up as a company. The notion of crowdsourcing funding is still in its infancy, so we are still waiting to see what emerges out of this ‘angel investor’ bubble.

Kickstarter’s goals are going to change as their company gains more traction, and they still need to work out their longterm strategy to continue to be relevant, which might include moving towards big businesses instead of startup companies.

You’re wrong about the Turtle Shell. I backed this project via Kickstarter and received a Turtle Shell last week as my ‘reward’ for funding the project. I didn’t pay twice, as your article claims Turtle Shell backers would have to do. Am I misunderstanding your claim? Because it appears you are flat wrong on this point.

Delia

I didn’t expect such an in-depth article.. I haven’t heard so much about big companies using kickstarter than I have amateurs who have no idea what they’re doing and in the process make hilariously bad campaigns : D

Zara

Hi Daniel. It’s great to hear that you received a Turtle Shell as a reward for funding. The point was about the many companies who get ‘funding’ and then don’t give anything back to people, especially when they are large companies. I will adjust the piece to make this clearer. Best

Christina Bridge

Thank you for such an in-depth article, I have been considering kickstarter to raise funding for a project that I am in the middle of producing, I shall look at these stats more carefully.